Private Equity Giant Eyes Chinese Solar

by Doug Young

Following reports last month of the imminent formation of a major
new private equity investor, media are now saying the company, China
Minsheng Investment, has formally registered and is
gearing up to make its first investments. The new company
certainly has the resources and connections to quickly become a
major player on both the domestic and global private equity
scenes, with an initial 50 billion ($8 billion) in registered
capital. Now it appears the company will start by helping to
consolidate China’s embattled solar panel-making sector, which
will become its first focus area.

According to the latest reports, Minsheng Investment formally
completed its registration on May 9 in Shanghai, which is where
several of its founding members are based. (Chinese article) One of its founders is Dong
Wenbiao, chairman of Minsheng Bank (HKEx: 1988;
Shanghai: 600016), China’s first privately funded bank. Previous
reports said other Minsheng Bank officials would also invest in
the new company. Another partner is Lu Zhiqiang, chairman of
Beijing-based China Oceanwide, one of the
country’s earliest conglomerates set up back in 1985.

Dong Wenbiao will act as chairman of the new company, while
another Minsheng executive Li Huaizhen will be the general
manager. The report adds that many of the new company’s other top
executives will also come from Minsheng Bank. That’s a positive
sign since Minsheng is considered one of China’s more
entrepreneurial banks due to its private status, meaning it’s less
likely to make decisions based on political considerations.

That said, many of the company’s top officials also have strong
government connections, and its decision to focus initially on the
solar panel sector also seems to have some political overtones.
Beijing decided about a decade ago to strongly support the sector
by offering a wide range of government support, in a move that
quickly propelled China to become the world’s largest solar panel
producer with more than half of the global market.

As with similar cases in China, many companies that flocked to
the industry were state-run firms that had little or no experience
in the sector but were simply rushing to help fulfill Beijing’s
latest policy directive. Many of those facilities have been losing
big money for the last 3 years, after the sector plunged into a
prolonged downturn due to huge overcapacity created by the rapid
China build-up.

Early signs last year seemed to indicate Beijing was preparing to
engineer a consolidation for the sector, using the policy lender China
Development Bank as the main driver. But such a unified
rescue plan never came, and instead the market has so far seen a
trickle of bankruptcies for big names like Suntech
(OTC: STPFQ)
and LDK Solar (OTC: LDKSY),
and occasional acquisitions of smaller companies by big remaining
players.

Beijing has indicated it won’t come to the rescue of bigger
players like Yingli (NYSE: YGE)
and Canadian Solar (Nasdaq: CSIQ),
which are relatively healthy and can still raise limited money
from overseas commercial sources. (previous post) But there are still dozens
and probably hundreds of smaller state-run operations that are
losing massive money and could become good acquisition and
consolidation targets for the new Minsheng Investment.

We’ll have to wait and see how exactly Minsheng Investment
proceeds, but I would expect it to move quickly following its
recent registration and make its first acquisitions in the next
few months. Most of those are likely to come at bargain prices,
and the company could use its large cash pile to quickly assemble
one or two major new “companies” with assets across China.

It would most likely shut down many of the weakest operations and
move their best manufacturing assets into one or two single
locations. Such an approach could produce an asset or two that
would make an attractive purchase for Canadian Solar, Yingli or
one of the other bigger remaining players in the sector, or even a
foreign buyer. I would expect Beijing to provide financing for
such a deal, which could come as soon as next year if Minsheng’s
consolidation plan moves ahead.

Bottom line: Newly formed Minsheng Investment
could become a consolidator for China’s smaller money-losing solar
panel makers, assembling a new asset for eventual sale to one of
the bigger remaining players.

Doug Young has lived and worked in China for 15 years, much of
that as a journalist for Reuters writing about Chinese companies.
He currently lives in Shanghai where he teaches financial
journalism at Fudan University. He writes daily on his blog, Young´s
China Business Blog, commenting on the latest
developments at Chinese companies listed in the US, China and Hong
Kong. He is also author of a new book about the media in China, The
Party
Line: How The Media Dictates Public Opinion in Modern China.